On One Shortcoming of Group Incentives

Abstract

Productive tasks are often designed so as to make one agent's output depend on the contributions of others, in which case the agents work as a group. This paper shows that, even if organizing agents in a group has no effect on productivity, task interdependence increases the principal's expected payoff. It does, however, reduce the total expected surplus. The results hold because, when shirking by one team member requires cooperation from his colleagues, it is cheaper to prevent, but the principal's expected payoff is maximized when the productive efforts are distorted away from the second best. The paper discusses some implications of this inefficiency.

Keywords: group incentives, task assignment, task interdependence, efficiency loss

JEL Classification: D82, D86